China's fixation with hypergrowth led to its economic miracle, but now it threatens to unravel this achievement.

China's high-growth dependency on fixed-asset investments has brought with it high energy costs, opening a Pandora's box of inflation, raising the costs of production, transport and labour, while reducing China's competitive advantage and threatening to roll back economic achievements that characterised the China economic miracle. These rising costs are driving many foreign manufacturers to relocate their investments from China to more efficient, labour intensive countries such as Vietnam, Malaysia and Indonesia, where wages and corruption are more containable.

In many ways, China's fixation with hypergrowth led to its economic miracle, but now it threatens to unravel this achievement. Aside from creating economic distortions and bubbles across the nation's economic landscape, it has also fuelled unrealistic expectations among the populace. Twenty years of hypergrowth have left a generation with no reference point of recession or depression. China's entry into the World Trade Organisation in 2001, and the massive influx of foreign capital since then, have integrated China into the global community in a way with which it had little experience.

The notion of keeping growth rates above 8 per cent began in 1998, when then premier Zhu Rongji issued a policy framework called "the three guarantees": no less than 8 per cent growth, no more than 3 per cent inflation, and a stable currency. Stimulus was used to build roads, ports and new cities, but within a rational framework. The decade under Premier Wen Jiabao amounted to blind adherence to this high growth rate. China's leadership for the past decade has judged everything based on gross domestic product. As a result, each province invests in redundant infrastructure to meet targets. This has consumed vast resources, forcing up prices in all sectors. Zhu's term in office focused on controlling inflation, for he knew the serious impact that rising prices could have on social stability. Yet, the current policy of focusing on growth in the belief that it will factor out inflation has unleashed forces beyond the state's control.

A decade of pumped-up growth has led to an unco-ordinated roll-out of infrastructure. While it is no doubt important to build a road from the industrial centres to a port, you don't need 10 roads, each laced with security surveillance cameras. The result has been unbalanced growth. Meanwhile, Wen unleashed all restrictions on mining; not surprisingly, coal mining surged during this period. Zhu's policies to reforest vast areas of landscape desecrated during the Great Leap Forward and Cultural Revolution were cancelled. Deforestation returned as mining licences were issued indiscriminately. China embarked on its global scramble for resources, and Chinese mining interests spread from South America to Africa. For China's leadership, this was the path to sustain growth and, in turn, social stability. Some mainland officials and economists, however, fear that this is unsustainable - capitalism on steroids that is in danger of derailing unless there is a return to older policies of balance.

The social cost of a teetering medical-pension system, and popular outrage over environmental destruction and its impact on people's physical and mental health, has led many Chinese to rethink the hypergrowth model and to seek something more holistic. A decade ago, the Chinese government reported there were about 80,000 riots a year, many sparked by local police abuse and corruption. Today, the conservative estimate is about 150,000 disturbances, a near doubling. The causes are still corruption and police abuse, along with land grabs and environmental destruction. Hypergrowth, far from being a source of social stability, is more likely to be the root cause of instability.

Much of the social unrest has been triggered by environmental desecration caused by industry in collusion with local governments. The construction boom has led to land grabs, facilitated and enforced by police abuse and financed by local corruption. Meanwhile, a privileged elite stuff their luxury homes with brand-name goods and gridlock the nation's traffic with BMWs, Mercedes and Ferraris while their golf courses deplete water resources. For the outgoing leadership and their coterie of business interests, these are signs of economic success. People in the street feel differently, and resentment is common.

For those outside the system, the edifices of growth and short-term profit seem insurmountable. Many on the inside realise China's economy has become fragile. China is now facing the same problems as it did a decade ago, requiring major reforms in many sectors. But one basic component remains: it still needs massive stimulus to drive the economy.

China must get back to basics with a more balanced macro-control policy as was used to transform China from socialism to a market economy, a system that seeks gradual adjustment rather than sudden shocks. Possibly the only way to do this is via a green economy.

A Chinese financial sector official observed: "This is a big challenge - bigger than the reforms of the 80s and 90s because then we did not know what capitalism was; but now we do. But each government department and every sector of the economy guards its own interests. Whether at the central or local level, it is all about controlling and profiting from resources. So this reform will be a much bigger challenge because we are not entering an unknown area - it is about people giving up what is already known."

This cannot be accomplished without re-examining China's social values. People are absorbed by what even the official state media calls "money worship". It has possessed the whole of society. International luxury brands are the means of social identity and status recognition. Finding more balance in economic growth means more than just relying on fiscal and administrative levers. It means redefining social success. For China, this may be the biggest challenge of all.

Laurence Brahm is an author, lawyer and political economist based in Beijing. Distributed by Pacific Forum CSIS. Copyright: Pacific News Service

This article appeared in the South China Morning Post print edition as Growing pains

No high growth, no "oil-water", especially as high growth came mainly from fixed-asset investments in infrastructures and in SOEs.

icwu Nov 13th 201212:46pm

Unfortunately, the 'Pandora's Box' has already been openned, which has given rise to too many powerful interest groups, both local and national, who is dependent on high growths at whatever costs in order to sustain their 'riches'. I'm pessimistic in reversing this trend. A top-down approach will not and is not likely to work (as many has hoped for with the new generation of leaders after the 18th) as this approach needs a powerful leader/leaders, who's era has long gone with the passing of paramount leader Deng. A bottom-up approach remains the only choice, which in turn calls for two approaches, a political one and a structural one. The former, 'political', approach, I think is unlikely and very difficult to implement at best and if not careful can cause much instability in society. This leaves the latter, 'structural' approach, as the feasible and likely choice. By 'structural' approach, I mean that appropriate basic structures (at the grass-roots) must be presented and offerred to both businesses and governments whereby there is enough incentives for businesses and governments to change away from their current modes of operations. The key word is 'incentives'. Due to limited space, I'll not go into the subject here. However, whatever the structures, they must provide the 'incentives' in such a way as to keep a harmoneous balance between Labor and Capital. This is important as the world is now entering such a new age.

Sunny Nov 13th 201211:08am

Adorning yourself with excessive luxury brands is only a sign of an inferiority complex and emptiness inside that will never fulfil it. Social success means doing something meaningful in your life that makes a difference to the people around you and to society. China has major problems, but the Chinese citizens have the ability to stand-up, educate themselves and help to contribute in making a better China.Don’t forget, the most influential documentary this year and essential viewing for everyone:
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